Discontinuing Operations (AS-24)

Need & Objective

The objective of standard is to establish principles for reporting

information about discontinuing operations. The focus of the disclosure of
the information is on the operations which the enterprise plans to
discontinue rather than disclosing about the operations which are already
discontinued.

If the enterprise has plan to discontinue the operation of particular

segment, the user has to understand the information about the
discontinuing operation distinctly from those of the continuing operation
so that the user can make projections of an enterprise cash flows, earning
generating capacity and financial position by segregating information
about discontinuing operation from information about continuing
operation.

Discontinuing Operation

As per paragraph 3 of the standard, a discontinuing operation is a

component of an enterprise:-

 That the enterprise, pursuant to a single plan is –

• Disposing of substantially in its entirety such as selling the

component in a single transaction ao by demerger or spin off
of ownership of the component to the enterprise’s
shareholders or

• Disposing of piecemeal, such as by selling off the

components asset and setting its liabilities individually or

• Terminating though abandonment and

 That represents separate major line of business or geographical

area of operation and

 That can be distinguished operationally and for financial reporting

purposes.

From the above definition, we can say that discontinuing operation is

relatively large component of an enterprise which is major line of business
or geographical segment, this is distinguishable operationally or for
financial reporting such component of business is being disposed on the
basis of an overall plan in its entirety on in parts. Discontinuance will be
carried either through demerger or spin-off, piecemeal disposal of asset
and settling of liabilities or by abandonment.

For Example: XY Ltd. has three major lines of business steel, tea and
electrical appliances; it has decided to sell the steel division during the
financial year 2002-2003. A sale agreement has been entered into on 30-
11-2002 with Z Ltd. Under which steel division shall be transferred to Z
Ltd. on 30-03-2003. This is a case of disposing of substantially in its
entirety. However, if resolution is passed for sale of various asset and to
repay the various liabilities individually of steel division, accordingly the
assets like land and building, plant and machinery are sold separately and
various liabilities like those of creditors are paid individually, it is a case of
“disposing by piecemeal”.

Termination by abandonment – An enterprise may terminate an operation

by abandonment without substantial sale of asset, however, if scope of
operation is changed, it is not case of discontinuing operation as the
operation is continuing although in altered manner, closure of product line
may not necessarily signify discontinuing operation if the operation is
continuing for a different product.

Abrupt or unplanned changes – further abrupt change or unplanned

change in product line is not discontinuing operation.

Some examples - Accounting standards gives some examples which do

not necessarily satisfy criteria of discontinuing operation but might be
considered discontinuing operation in combination with other
circumstances i.e. –

 Gradual phasing out of product line or class of service.

 Discontinuing, even if abruptly, several products within an ongoing

line of business.

 Shifting of some production or marketing activities for particular line

of business from one location to another.
  Closing of facility to achieve productivity, improvements or other
cost savings.

 Selling a subsidiary whose activities are similar to those of the

parent or other subsidiaries – this is relation to consolidated
financial statements. In fact it is a case of disposing of investments
in subsidiary or subsidiaries.

Initial Disclosure event

Information about planned discontinuance must be disclosed in the first

set of financial statement immediately after the ‘initial disclosure event’,
initial disclosure event is the event out of these two and whichever occurs
earlier –

 Entering into an agreement to sell substantially all the asset of the

discontinuing operation.

 Approving and announcing of the discontinuance plan.

Presentation & Disclosure

 Initial disclosure – First disclosure after initial disclosure event

occurs about the discontinuing operations.

• Description of the discontinuing operation.

• Business or geographical segments in which it is reported.

• Date and nature of initial disclosure event.

• Timing of expected completion of discontinuance.

• Carrying amount of total assets and liabilities to be disposed

of.

• Amount of revenue and expense attributable to discontinuing

operation.

• Amount of pre-tax profit or loss and tax expense attributable

to discontinuing operation.
 • Net cash flows attributable to the operating, investing and
financing activities of the discontinuing operation.

 Other disclosure – when an enterprise of asset or settles liabilities

attributable to discontinuing operation, the following other
information are also disclosed.

• Amount of gain or loss recognised on the disposal of assets or

settlement of liabilities and related income-tax.

• Net selling prices from the sale of those net assets for which
the enterprise has entered into binding sale agreements and
the expected timing thereof and carrying amount of those
assets.

Manner of disclosure

The disclosure of amount pre-tax profit or less and tax expense and
amount of gain or losses recognised on disposal of assets and settlement
of liabilities should be disclosed on the face of statement of profit/loss
accounts, other information should be disclosed in the notes to accounts.

Updating the disclosure

The disclosure required for discontinuing operation should continue in

financial statements for the period up to and including the period in which
the discontinuance is completed, the disclosure require should be
updated.

Recognition and Measurement

Standard prescribes that an enterprise should comply with the principles

of recognition and measurement that are set out in other accounting
standards for the purpose of deciding how and when to recognise and
measure the changes in asset and liabilities and the income and expense
and cash flow of discontinuing operation.

Interim Financial Reports

Interim financial reports should disclose in its notes any significant

activity or event since the end of the most recent annual reporting
relating to discontinuing operation and any significant change in the
amount or timing of cash flows relating to asset and liabilities to be
disposed/settled.
INDIAN GAAP/AS-24 IFRS/IAS-5 US GAAP/FASB-144

Title

AS-24 has been titled IFRS-5 is named as US GAAP is titled as

as “discontinuing “Non-current assets “Accounting for the
operation “ held for sale and impairment of Disposed
discontinued operation” of Long-lived assets”

Time of Disclosure Event

The disclosure for The disclosure for The disclosure for

‘discontinuing ‘discontinuing ‘discontinuing’ will be
operation’ is to be operation’ is done after earlier as compared to
made after the ‘initial the classification of IFRS-5 & AS-24
disclosure event’ non-current asset as
‘held for sale’

Calculation

As per AS-24 these As per IFRS-5 after the
assets are to be carried non-current assets are
at cost less classified as ‘held for
depreciation less sale’ these will be
impairment loss. carried at lower of
carrying amount and
fair value.
As per US GAAP after
the non-current assets
are classified as ‘held
for sale’ these will be
carried at lower of
carrying amount and
fair value.

Presentation

As per AS-24 do not As per IFRS-5, As per US GAAP do not

prescribe so and, Asset/Liabilities prescribe so and,
disclosure is made classified as ‘held for disclosure is made
through notes to sale’ to be presented through notes to
accounts. separately on the face accounts.
of the balance sheet
similarly income
pertaining to
discontinuing operation
to be separately
disclosed on the face of
income statement.

Accounting Standard - 24
(Discontinuing Operation)

Submitted By :
Roll No. Name
07 Sarvesh Chavan
40 Umesh Parulekar

Submitted To :
Prof. Sadhana Ogale
 DEPARTMENT OF
MASTER OF MANAGEMENT STUDIES

SARASWATI COLLEGE OF ENGINEERING, KHARGHAR